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INTERNATIONAL BUSINESS 200 Foreign Exchange Worksheet Fall 2008 1 Please use 4 decimals without rounding for calculations and answers. We will use 4 decimal places without rounding in our answer key for this worksheet. 1. You are in Toulouse, France on a business trip. You read the local newspaper Le Monde and find the following foreign exchange information. Please label each of these quotes as either a Direct, Indirect, or Cross quote. a. 1 Euro = 10.6 Chinese Yuan b. 1 British Pound = 1.43 Euro c. 1 USD = 114 Japanese Yen d. 2.89 Argentine Peso = 1 USD e. 46 Taiwan Dollar = 1 Euro 2. Sitting in your hotel room in Toulouse, you start planning your next trip to Shanghai. You surf on the Internet and find the following foreign exchange rates: ? China Construction Bank, one of China?s largest banks, posts the following i. 10.6141 Chinese Yuan = 1 Euro ii. 7.5075 Chinese Yuan = 1 USD ? The bank next to your hotel, BNP Paribas, posts the following exchange rate i. 0.70 Euro = 1 USD a. In which country is the USD overvalued/stronger? ___________ b. In which country is the Euro undervalued/weaker? ____________ c. You have 1,000 Euros left over from this trip to France and you want to get the most Chinese Yuan out of it for your trip to Shanghai. Should you sell your Euros in France and bring the USD you get to buy Chinese Yuan in Shanghai?_______ (If your answer is No, you would then buy Chinese Yuan in Shanghai with your Euros) d. Looking at your 1,000 Euro in hand, you notice that there is a price discrepancy between USD and Euro in these two markets. How much profit can you make through a single round of immediate arbitrage with your 1,000 Euros with the given exchange rates? (Remember to use 4 decimal places for calculations/answers) _____________Euro 3. You plan to go to India in 3 months on a budget of 90,000 Indian Rupees (INR). You get the following information from the Bank in Madison: USD INR Annual Interest Rate 3% 4% Spot rate for USD and INR today: 1 USD= 39.72 INR a. You decide to save money in a Rupee account for the trip. How many USD do you need today to buy INR so that you have exactly 90,000 INR in 3 months? ____ ______ b. You decide to save the money in USD but would like to lock in a 3-month forward rate with the bank to minimize risks. With the given spot rate and interest rates, what should be the 3-month forward rate of USD to INR? 1 USD= _________ INR c. With the forward rate you calculate in (b), how many USD should you save today so that you will have enough USD to buy exactly 90,000 Rupees in 3 months? _____________ USD INTERNATIONAL BUSINESS 200 Foreign Exchange Worksheet Fall 2008 2 For the next two questions, please use the two tables that follow. Exchange Rates (USD per Euro) Spot Rate Forward Rate 3 months 6 months 1 year USD 1.4138 1.4198 1.4233 1.4255 4. You have 100,000 USD to invest over the next 6 months. a If you save 100,000 in USD for 6 months, you are going to receive _________USD. b If you convert 100,000 USD into Euro, and save for 6 months, you will receive _______Euro. c If you use the 6-month forward contract rate to convert the Euros you received in question (b) back to USD, you would then receive _________ USD. d Which currency gives you a higher return on your 100,000 USD investment? ____ _______ e Assume that borrowing and saving interest rates are the same and that you can borrow either Euro or USD at the given interest rates. Can you profit through arbitrage with the given interest rates and exchange rates? _________ 5. You own a Madison-based company that sells air conditioning equipment in Spain. On 11/1/2008 you ship out an order to your Spanish buyer. You know your customer will pay you 60,000 Euro in 3 months (2/1/2009) and you would then convert the money immediately back to USD. You want to hedge your currency risk on receiving this foreign payment. (Give your answers in amount and currency) a What is the amount of money that you will receive today through a natural hedge? ______ b What is the amount of money that you will receive through a contractual hedge? _______ What is the value of that contractual hedge today? _________ c Suppose you use the 60,000 Euro business contract as collateral to borrow money from the bank, through a natural hedge, and you receive today the money you calculated in (a). Then, you pay for production costs of 60,000 USD. How much profit do you keep? _________ d Suppose you don?t hedge and just wait patiently for the 60,000 Euro payment from your Spanish buyer. 3 months later, the spot rate turns out to be 1 Euro=1.42 USD. How much USD do you get then? _________ OPTIONAL: e What is the USD annual interest rate that would make you indifferent between a natural and a contractual hedge? (You don?t need to compound for the interest rate)________ Interest Rate ( Annual) USD 3.50% Euro 2.50% Today?s Euro Euro in 6 months Today?s USD USD in 6 months 6 month Euro rate 6 month USD rate Spot rate Forward rate Miriam Thangaraj Microsoft Word - WorkSheet1IB200Fa08.doc